Credit Access in Tanzania: Small and Medium-Sized Enterprises

SEATTLE — The success of small and medium-sized enterprises (SME’s) is essential to the growth of rising economies all around the world. In developing countries, SME’s account for about 60 percent of national employment; in Tanzania, they produce roughly 27 percent of the national GDP. In a country so reliant on the economic contributions of such enterprises, it is extremely important that SME’s are able to stay afloat.

The Structure of SME’s

SME’s are enterprises that employ a relatively small number of people, usually between 250 and 500. They typically exist in the processing, manufacturing and trading sectors. For these enterprises to survive, they must have access to consistent capital, which may often come in the form of credit. Most businesses rely on loans in order to be able to pay for things like technology and means of production. The prices and demand for such things fluctuate over time, but credit access allows SME’s to be able to obtain such resources even if they are not immediately able to pay them off.

Reasons for Restricted Credit Access

Tanzanian SME’s face low rates of credit access. About 70 percent of SME’s in the country do not use any form of credit. Credit access in Tanzania is impeded by the fact that many enterprises cannot afford it, do not want it or do not qualify for it. This is due to a number of factors:

The fact that many SME’s do not qualify for credit can be attributed in part to the poor business education programs in the country. Since people are not properly educated in business management, financial managers often make poor choices that effectively reduce their enterprises’ credibility with banks. Poor management causes banks to see an enterprise as too risky to loan to.

Some Tanzanian SMEs do not want to utilize credit because they perceive interest rates as too high. In Tanzania, the average interest rate on credit is 9 percent. By comparison, the average interest rate on credit in Brazil and India is 6.5 percent.

Credit agreements often come with collateral requirements. In a growing economy like Tanzania, people have limited material possessions of high value to tie to their credit agreements. With little capital to invest in loans and only limited material possessions to collateralize a credit agreement, the potential fallout of having to default on a loan is disastrous and ultimately not worth it for many Tanzanian SME’s.

Solutions to Increase Credit Access

There is no simple solution to the problem of low credit access in Tanzania, and steps are still being taken to address some of its causes. For example, in 2017 a program was initiated to reduce the cost of loans across the country. The goal of this was to increase lending and thus increase public spending, all of which would boost the Tanzanian economy. The program effectively lowered the interest rate on loans from 12 percent down to 9 percent.

Other countries like the United States could consider bringing their high levels of business and finance education into countries like Tanzania. Spreading the resource of business expertise and understanding may be the most sustainable solution to this particular issue. As businesses become able to handle their finances better, they will likely increase their profits, pay their debts and continue to stimulate economic growth. Through such growth, new businesses may emerge and provide higher rates of employment.

In order to increase credit access, organizations like FINCA and First Access propose alternative processes of credit scoring that could allow businesses with little income and little credit history to receive qualifying credit scores. This will enable businesses that begin with few resources to grow and become more profitable.

These are all just the first steps to increasing credit access in Tanzania. The country continues to search for practical and innovative ways to increase access to credit so that all businesses have the ability to produce profit and grow.